Here's what I'm guessing has happened so far.

In Accounts Payable for 'bad vendor':

1.  An invoice (debit expenses, refundable GST/HST, credit accounts payable) in 'bad vendor' account.

2. A payment (debit accounts payable, credit bank) in 'bad vendor' account.

3. The invoice from step 1 was deleted (undoing the expenses / refundable GST/HST, and creating the debit balance for 'bad vendor'.

In Accounts Payable for 'good vendor':

1. An invoice (debit expenses, refund GST/HST, credit accounts payable) in 'good vendor' account.

2. A payment (debit accounts payable, credit bank) in 'good vendor' account.

In bank reconciliations:

1. The cheque to 'bad vendor' was marked as cleared.

2.  The cheque to 'good vendor' still shows as outstanding.

Overall result:

- Expenses / refundable GST/HST recorded 1x (in and out for 'bad vendor', then in again in 'good vendor')

- Payment recorded 2x (once in 'bad vendor' and once in 'good vendor'.

- Looking only at this invoice, 'bad vendor' has a debit balance in payables (which is wrong), 'good vendor' shows as all paid up (which is correct).

Is this correct?

If so, the easiest way to fix this is with two entries into Accounts Payable for 'bad vendor'.

1.  Create an 'invoice' to offset the debit balance.  The only item on the invoice should be a debit to your bank account to reverse the double-recording of the cheque.  Before posting, check the journal entry under 'report'.  It should be debit bank, credit accounts payable.

2.  Create a zero-dollar 'receipt' to apply the debit balance against this new invoice.

Check your Accounts Payable detail report including invoices paid in the last zero days for 'bad vendor'.  There should no longer be anything relating to the debit balance or the phony invoice on it.

Next time you reconcile your bank, you'll be able to 'clear' both the credit from the old cheque, and the debit from the new invoice.

Thank you so much!! It worked.

Hi Raz , if the  above suggested answer helped, please mark it as verified 

 (just click the "…" button next to Reply on the helpful response). This helps others in the forum quickly spot solutions . Thank you!